Description
IRS Tax Audit Manual for the Manufacturing Industry
Overview of the industry. Emphasis on change of accounting method, IRC section 263A, and inventory.
TABLE OF CONTENTS
- Chapter 1
- Introduction Purpose 1-1
- How This Guide Is Presented 1-1
- Manufacturing 1-2
- Principal Industry Activity (PIA),
- Principal Business Activity (PBA), and
- Standard Industrial Classification Codes 1-3
- Audit Technique Guides (ATG) 1-4
- Industry Specialization Program (ISP) 1-4
- Chapter 2
- Understanding the Production
- Process Introduction 2-1
- Types of Manufacturers 2-1
- Costing Methods for Manufacturing 2-2
- Planning the Audit 2-2
- Identification of Potential Issues/Tax
- Return Analysis 2-2
- Specialty Referrals 2-7
- Comparative Years Analysis 2-8
- Ratio Analysis 2-9
- Initial Interview 2-10
- Touring the Facilities 2-11
- Specific Observations 2-13
- Flowcharting the Production Process and
- Related Source Document Flow 2-15
- Chapter 3
- Required Filing Checks Introduction 3-1
- Employment Tax Reconciliation 3-1
- Employee Versus Independent Contractor 3-2
- Other Employment Tax Issues — In General 3-4
- Interest Free Adjustments 3-6
- Information Returns 3-6
- Form 1099 3-7
- Examination Techniques 3-7
- Information Returns Statute of Limitations 3-10
- Backup Withholding 3-10
- Assertion Procedures 3-11
- Abatement Procedure 3-12
- Related Returns 3-12
- Identifying Related Returns 3-13
- Corporate Taxpayer — Shareholder Issues 3-13
- Other Related Return Issues 3-17
- Foreign Entities 3-20
- Chapter 4
- Balance Sheet Introduction 4-1
- Interrelationship Between Balance Sheet and
- Income Statement 4-2
- Effect of Balance Sheet Adjustments on
- Taxable Income 4-3
- Preliminary Audit Steps 4-4
- Reconcile the Book Accounts to the Return 4-4
- Comparative Analysis 4-5
- Auditing a Balance Sheet Account and
- Schedules M-1 and M-2 4-5
- Cash 4-6
- Accounts Receivable 4-10
- Inventory 4-14
- Loans to/from Shareholders 4-14
- Building and Equipment 4-18
- Accounts Payable, Other Current Liabilities and
- Other Liabilities 4-21
- Capital Stock/Capital Account 4-24
- Retained Earnings 4-25
- Schedule M-1 and Schedule M-2 4-26
- Chapter 5
- Sales and Income Issues Introduction 5-1
- How Sales Are Generated 5-1
- Independent Sales Staff 5-1
- In-house Sales Staff 5-2
- Trade Shows 5-2
- Newspaper Advertisements/Mailers 5-2
- Sales Marts 5-2
- Word of Mouth 5-2
- Public/Employee Sales 5-2
- General Audit Techniques 5-2
- Understanding the Sales Cycle 5-2
- Understanding the Accounting
- System/Internal Controls 5-4
- Specific Audit Techniques 5-4
- Internal Revenue Manual 4231.582 5-4
- Other Recommended Income Probes 5-7
- Other Income Issues 5-8
- Unreported Interest Income 5-8
- Bargain Purchases Under
- IRC section 311(b) 5-8
- Lease Inclusion Income:
- Passenger Automobiles 5-9
- Contra-Sales Accounts 5-10
- Returns 5-10
- Allowances in General 5-10
- Warehouse Allowance 5-10
- Markdown Allowance 5-11
- Advertising Allowance 5-11
- Yearend Allowance 5-11
- Volume Allowance 5-11
- Trade Discounts 5-11
- Cash Discounts 5-12
- Accounting for Returns,
- Allowances and Discounts 5-12
- Chapter 6
- Inventory Introduction 6-1
- Why Audit Inventories? 6-1
- Types of Manufacturers 6-5
- Custom 6-5
- Production 6-5
- Combination 6-6
- Costing Methods for Manufacturing 6-6
- Job Order Costing 6-6
- Process Costing 6-6
- Operation Costing 6-6
- Inventories 6-7
- Auditing Inventory 6-8
- General Audit Techniques 6-9
- Issues 6-18
- Incorrect Inventory Counts and Omissions 6-18
- Improper Valuations 6-24
- Inventory Write-Down Under the
- Lower of Cost or Market Method 6-25
- Audit Techniques – Improper Valuations 6-28
- Standard Cost Variance Treatment 6-30
- Other Considerations 6-35
- Practical Capacity 6-35
- Idle Capacity 6-35
- LIFO Inventory Valuation 6-35
- Long-Term Contracts 6-36
- Chapter 7
- IRC Section 263A –
- Uniform Capitalization Introduction 7-1
- IRC Section 263A –
- Uniform Capitalization 7-1
- All Direct Costs 7-2
- All Indirect Costs Associated with Production 7-2
- Audit Techniques 7-3
- IRC Section 263A Regulations: Post 199 7-15
- IRC Section 263A Regulations:
- Post 1993 for Self-Constructed Assets and
- Interest Capitalization 7-16
- Chapter 8
- Change in Accounting Method Introduction 8-1
- What Is a Change in Accounting Method? 8-1
- IRC Section 481
- Adjustment 8-4
- Category A or Category B
- Method of Accounting 8-5
- Year of Change 8-6
- IRC Section 481(a) Adjustment Period 8-6
- How IRC Section 481 Interacts with an
- Inventory Adjustment 8-7
- IRC Section 481(b)(1) and
- IRC Section 481(b)(2) Limitations 8-10
- Revenue Procedure 94-49 8-13
- Scope of Rev. Proc. 94-49 8-13
- Procedures to Obtain Automatic Consent 8-14
- Other 8-14
- Revenue Procedure 95-25 8-14
- Revenue Procedure 95-33 8-15
- Court Cases 8-15
- Chapter 9
- Research and Development Introduction 9-1
- IRC Section 174: Definition of Research and
- Experimental Expenditures 9-1
- IRC Section 41:
- Credit for Increasing Research Activities 9-3
- Definition of “Qualified Research” 9-3
- Definition of “Qualified Research Expenses” 9-6
- Definition of “Qualified Wages” 9-6
- Qualified Supplies 9-7
- Qualified Contract Research 9-7
- Computer Software Development Costs 9-8
- Revenue Procedures 69-21 9-8
- Costs to Develop Internal-Use Software 9-8
- Summary of Computer Software
- Development Costs 9-10
- Specific Issues Relating to the Research Credit 9-10
- Wages Paid to Technical Writers
- Re: User Manuals 9-10
- Employee and Employer Contributions to a Deferred
- Compensation Plan as Defined in Section 1.401(k) of
- the Income Tax Regulations 9-11
- Wages paid to Managers Above the
- Level of First-Line Supervisors 9-11
- Base Period Recomputation 9-12
- BETA Testing –
- Testing Conducted by Customers 9-12
- Costs Attributable to Reviewing a
- Competitors Product 9-12
- Costs to Develop Internal Use Software 9-13
- Software Expenditures Capitalized for
- Book Purposes Per FAS 86 9-13
- Small Tools and Purchased Software 9-14
- Costs of Developing Generic Drugs 9-14
- Summary of Computation of the Research Credit 9-14
- Computation of the Research tax Credit 9-16
- Base Amount Computation 9-16
- IRC Section 280C(c)(3): Reduction of
- Credit Versus Expense 9-19
- Alternative Minimum Tax 9-19
- Research and Development Tax Shelters 9-20
- Audit Techniques 9-20
- Manufacturing Glossary G-1